Board monitoring and firm performance: controlling for endogeneity and multicollinearity

Purpose of this study is to investigate the relation between board monitoring and firm performance after controlling the endogeneity and multicollinearity problem that exist in most corporate governance research. Prior studies failed to establish any significant relationship between board monitoring and firm performance because of not properly control for endogeneity and multicollinearity problems. After controlling for both problems the coefficient of board monitoring increases and becomes significant. This study use different board monitoring characteristics: board size, number of board meetings, proportion of independent directors, background of directors CEO/Chair duality; and different characteristics of audit, compensation and nomination committees: number of meetings and proportion of independent directors. Firm performance is measured using return on assets and earning per share. Panel data of the top 500 listed companies from Australian Stock Exchange (ASX) is used over 3 years, from 2001 to 2003. This study concludes that the difference in the result is because addressing the problem properly using structural equation modelling.